It's hard to overstate just how solid October has been for investors. As we finish off the final week of the month, the big S&P 500 index has managed to rallied nearly 9% in the biggest single-month performance of the year.
No doubt about it, if you own stocks right now, that recent rally has been a very good thing. But not everything has been moving up in October. As I write, 78 S&P components are actually down this month – that's about one in six stocks that's underwater.
That's an important stat. While the broad market may be clawing its way back through positive territory overall, a pretty meaningful chunk of the market is still looking "toxic" for your portfolio. And avoiding the wrong stocks this fall could be even more important for your investment performance than picking the right ones.
Today, we're turning to the charts to figure out which big stocks to avoid now -- and what price triggers need to get broken for them to go from red flags to outright toxic trades.
Just to be clear, the companies I'm talking about today aren't exactly junk. By that, I mean they're not next up in line at bankruptcy court. But that's frankly irrelevant; from a technical analysis standpoint, sellers are shoving around these toxic stocks right now. For that reason, fundamental investors need to decide how long they're willing to take the pain if they want to hold onto these firms in the weeks and months ahead. And for investors looking to buy one of these positions, it makes sense to wait for more favorable technical conditions (and a lower share price) before piling in.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better entry and exit points.
So, without further ado, let's take a look at five toxic stocks to sell.
Up first is $24 billion Indian banking stock ICICI Bank (IBN) . Overall, 2015 has been a rough patch for this overseas financial firm. Shares have lost about 25% of their market value since the calendar flipped to January. But there might be a lot more downside ahead thanks in part to a bearish price pattern that's been setting up for the past three months now.
ICICI Bank is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support down below shares (in this case at the $8.25 level) and downtrending resistance to the upside. Basically, as shares of ICICI Bank have bounced in between those two price levels since the start of August, shares have been getting squeezed closer and closer to a breakdown below our support line. When that happens, we've got a sell signal.
Relative strength, which measures ICICI Bank's price performance versus the broad market, is an extra red flag to watch here. Our relative strength line is holding onto its long-term downtrend here, which indicates that this stock continues to underperform the rest of the market in October. Caveat emptor.
We're seeing the same price setup in $10 billion document management firm Xerox (XRX - Get Report) right now. There's just one big difference in Xerox's descending triangle setup: This breakdown has already triggered.
The sell signal came this week when Xerox shares violated key support at $9.50.
Why all of the significance at that $9.50 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle pattern in Xerox, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Xerox's shares.
The $9.50 support level is a price where there has been an excess of demand for shares; in other words, it's a spot where buyers have previously been more eager to step in and buy than sellers have been to take gains. That's what makes a breakdown below $9.50 so significant. The move means that sellers are finally strong enough to absorb all of the excess demand at that price level. With $9.50 in the rearview mirror, Xerox owners should consider selling until shares can catch some semblance of support again.
ICICI Bank isn't the only large overseas banking stock that's struggling in this market; $40 billion Brazilian bank Itau Unibanco (ITUB) is looking toxic this fall too. The thing is, you don't need to be an expert technical trader to figure this one out. Instead, the price action in Itau Unibanco is about as simple as it gets; here's how to trade it.
Since May, shares of Itau Unibanco have been bouncing their way lower in a well-defined downtrending channel. The firm's downtrend is formed by a pair of parallel trend lines that identify the high-probability range for shares of this stock to remain stuck within. Every test of the top of this stock's price channel has been a great selling opportunity so far, and shares are tracking back down the channel after their most recent failed test of resistance earlier this month.
IBN and ITUB aren't the only foreign financials that are laggards in this strong dollar environment, and that means it's worth re-evaluating any other similar positions in your portfolio right now. While U.S. financials are showing strength in October, overseas peers are hemorrhaging value right now.
Packaging Corp. of America
Mid-cap containerboard producer Packaging Corp. of America (PKG - Get Report) is another stock that's been selling off all year long in a well-defined downtrending channel. Since the start of this year, Packaging Corp. has shed almost 15% of its market value, lagging the big averages by a broad margin. And as shares test trendline resistance for a sixth time this year, it makes sense to sell the next bounce lower.
Waiting for that bounce lower before clicking "sell" is a critical part of risk management for two big reasons: It's the spot where prices are the highest within the channel, and alternatively it's the spot where contrarians will get the first indication that the downtrend is ending. Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're confirming that sellers are still in control before you unload shares of Packaging Corp.
The 200-day moving average has started acting like a decent proxy for resistance in the last few months. Bargain-hunters should wait for PKG to trade above that moving average -- indicating the end of the downtrend -- before trying to call the bottom in this stock.
Marcus & Millichap
Last up on our list is brokerage firm Marcus & Millichap (MMI - Get Report) . Unlike most of the stocks on this list, Marcus & Millichap has actually shown investors some pretty stellar performance in 2015, rallying more than 29% since the beginning of this year. But shareholders might want to think about taking some of those gains off the table; this stock is starting to look "toppy" in the long-term thanks to a classic reversal pattern.
Marcus & Millichap has spent the last several months forming a head and shoulders top, a bearish reversal pattern that signals exhaustion among buyers. The head and shoulders pattern is formed by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal comes on a move through Marcus & Millichap's neckline – that's at the $40 price tag. If $40 gets violated, then this stock opens up considerable downside risk.
Finally, the side-indicator to watch right now in Marcus & Millichap is momentum. Our momentum gauge, 14-day RSI, has been rolling over, making lower highs on each of Marcus & Millichap's successive price peaks. That's an indication that down days are outpacing up days in this stock.
Like with any breakout trade, it's important to be reactionary here. Big downside in Marcus & Millichap doesn't become a high-probability trade until sellers are able to knock this stock below our $40 neckline level.